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Using annuities to avoid income tax on Social Security benefits

You may be surprised to learn that in some cases, Social Security retirement income is taxable. This is the case if you generate other “substantial” income while you are also receiving Social Security and you are also under your full retirement age (FRA).

Social Security Full Retirement Age

Year of BirthMinimum Retirement Age for Full Benefits
1937 or before65
193865 + 2 months
193965 + 4 months
194065 + 6 months
194165 + 8 months
194265 + 10 months
1943 to 195466
195566 + 2 months
195666 + 4 months
195766 + 6 months
195866 + 8 months
195966 + 10 months
1960 or later67

Source: Social Security Administration

Depending on the amount of other income that you receive, as well as the way in which you file your annual income tax return, you could be taxed on either 50% or 85% of your Social Security income. And if you are, it could make a big difference in your retirement lifestyle.

Are Social Security Retirement Income Benefits Taxable?

The government calculates your Social Security retirement income payment amount – and can also decrease your Social Security retirement benefit amount – based on all of your “reportable” income.

Any reportable income from mutual funds, corporate bonds, treasuries, CDs (certificates of deposit), and individual stocks could decrease your Social Security benefit payments. Even the interest that you may receive on municipal (“muni”) bonds – which is typically tax exempt – is also considered when determining the taxability of your Social Security retirement benefits.

In order to determine whether or not your benefits will be taxable, the Social Security Administration (SSA) uses a figure that is referred to as your “combined income.” This is determined by taking your adjusted gross income and adding any non-taxable interest and one-half of your Social Security benefits.

Adjusted Gross Income
Non-taxable Interest
½ of your Social Security benefits
Combined Income

So, for instance, if you file your federal income tax return as an individual (in 2021), and your combined income is:

  • Between $25,000 and $34,000, then you could have to pay income tax on up to 50% of your Social Security benefits;
  • More than $34,000, up to 85% of your Social Security benefits could be subject to federal income tax.

If you file a joint income tax return, and together you and your spouse have combined income that is:

  • Between $32,000 and $44,000, you could incur federal income tax on up to 50% of your Social Security retirement benefits;
  • More than $44,000, then up to 85% of your benefits could be taxable

How to Use an Annuity to Reduce or Eliminate Tax on Social Security

Social Security does not count pension payments, interest or dividends from your savings and investments, or annuity payments as earnings. Therefore, these payments will not lower your Social Security retirement benefits.

Therefore, you may be able to use an annuity (or more than one annuity) to either reduce or eliminate tax on your income from Social Security. Based on Section 72 of the IRC (Internal Revenue Code), funds that are inside of an annuity can grow tax-deferred – so there is no tax due on this gain that takes place inside of the account.

In addition, any principal that has already been taxed can also come out of an annuity free of income taxation. So, for instance, if you generate income from a non-qualified annuity (i.e., one that is not held inside of a traditional IRA or retirement plan), a portion of your income will consist of your contribution – and thus will not be taxable when withdrawn.

Is Your Retirement Income Plan Tax-Efficient?

According to the Social Security Administration, about 40% of people who receive Social Security income have to pay income taxes on their benefits. But with the right retirement income strategy, you may not have to – and in turn, can have more spendable cash flow in the future.

Coordinating a retirement income plan can be complicated. That’s why it is recommended that you work with a specialist who is well-versed in this area. At Annuity Gator, we help consumers (and financial professionals) to better understand annuities and how they may (or may not) fit into a retirement plan.

If you have questions, feel free to contact us directly at (888) 440-2468 or you can email us with any annuity-related questions that you have by going to our secure online contact form and we’ll be happy to help.

Using annuities to avoid income tax on Social Security benefits

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